Illustrate the budget line associated with voucher program

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Reference no: EM133275962

Question - The New York City Council would like to increase the weekend ridership of the subway system. One proposal is to lower the fare for riders to $2.5. In order to do so the City Council promises to reimburse the Metropolitan Transit Authority (MTA) $.25 for each of the reduced fare rides (so the MTA still receives $2.75 per ride). An alternative proposal to increase ridership is to simply provide free subway rides to individuals. One way to do so is to send to each individual vouchers that are good for free subway rides. The cost to the City Council of each voucher is the full cost of a subway ride $2.75.

a) If the City Council would like to spend on Gotham the same amount on the two programs (the fare reduction and the voucher system) then how many vouchers should it send to Gotham? Illustrate the budget line associated with the voucher program in a new diagram.

Include in your diagram the two previous budget lines. Make sure that you indicate which lines have the same slope and if two lines intersect then label the point of intersection.

b) Will Gotham still choose to ride the subway 22 times per month (this includes the free subway rides)? Why or why not? Use a diagram to illustrate your answer.

c) Which of the two proposals will be preferred by Gotham? Briefly explain your answer. Which of the two proposals will result in a greater number of subway rides?

d) Is Gotham's optimal choice under the voucher system program Pareto efficient? Explain.

e) Which of the two proposals would you support and why? Clearly explain your reasoning.

Reference no: EM133275962

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